The Week Ahead: It's strong but not sexy: Tesco falls victim to its own success

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The Independent Online

Another mixed bag of retail sector trading updates and a sprinkling of economic data this week promises to maintain pressure on the Bank of England to relax interest rates.

Leading the way is Tuesday's December Consumer Price Index (CPI), with economists predicting a relativity benign inflation result of around 2 per cent - spot on the central bank's stated target. After last year's concerns, UK inflation appears contained, with soaring energy prices offset by a moderation in consumer goods pricing.

In contrast, retail sales volumes from the Office for National Statistics for the Christmas period may well fall on a monthly basis despite healthy festive trading surveys from the British Retail Consortium and the CBI, and better-than-expected results from some retailers. According to economists at HSBC, only twice in the past 20 years have retail sales expanded in November and December. "Given November's sharp rise, we believe the risk to consensus and our own estimates are on the downside", said HSBC's John Butler.

While Tesco is less leveraged to the vagaries of consumer fashion, the supermarket chain may stagger under the weight of its own historically strong performance. Analysts expect UK like-for-like sales growth during the Christmas period to be between 5.5 per cent to 6 per cent, against last year's bumper 7.6 per cent growth.

But, in a sector characterised by turnaround stories at J Sainsbury and Marks & Spencer, such a result may not be sexy enough to drive the group's share price.

"J Sainsbury has materially closed the gap on Tesco in like-for-like terms, and while it would be churlish to say that 5.5 to 6.0 per cent life-for-like wasn't a very good outcome, I think the shares are discounting this already," said Jonathan Pritchard, an analyst from Oriel Securities.

Last week's TNS data showed evidence of a slight deceleration in Tesco's growth - 9 per cent versus 13.5 per cent last year. In contrast, Sainsbury's saw strong December improvement. And, even laggard Wm Morrison is showing signs of stabilisation.

Analysts at Goldman Sachs estimate that UK food retailers will invest a staggering £1.2bn in price cuts during 2006 - led by number-two-placed Asda and its desire to regain its 5 per cent average price differential over Tesco. This is great for consumers, but a real test for the business models of the four major supermarket chains. The prediction is that Tesco will come out on top, with the major risks being offshore expansion and the increasingly cyclical nature of its business as it moves away from its core food operation.

Simon Proctor, an analyst at Charles Stanley Securities, is keen to compare Tesco's non-food performance with those of electrical and white goods retailers DSG International and Kesa Electricals. "While the white goods market has been pretty slow, the portable audio market - iPods and MP3 players - has been strong," he said.

Analysts expect mixed results from both DSG International, formerly known as Dixons, and Kesa. DSG is expected to report a pre-tax interim profit of around £94m, with a fairly flat like-for-life sales figures. In contrast, Kesa is likely to show a turn-around at the struggling UK Comet, with its French outlets still suffering from a price war and last year's riots.

Another company considered to have done well to avoid an early sales warning is fashion retailer Austin Reed. Sanjay Vidyarthi, an analyst at Teather & Greenwood, says the firm may be saved by December's cold snap. "But they have their work cut out in terms of maintaining margin, with sales under pressure and a rising cost base."

Fashion brand Ted Baker may surprise on the upside with anecdotal evidence of strong Christmas trading. Not only has mens-wear sold well in its concessions in department stores such as House of Fraser, but Boots moved a phenomenal one million Ted Baker gift packages during the Christmas period.

Outside the retail sector, SABMiller is posting third quarter volume data. Nigel Davies of JPMorgan expects the brewing giant to report a 4.3 per cent rise in beverage volumes. While volumes at US brewer Miller may weaken, this is likely to be offset by an improving Bavaria division.

Finally, P&O's planned extraordinary general meeting will get under way this week, before being immediately adjourned. The ports group is allowing time for new suitor PSA International, an arm of the state-backed Singaporean investment group Temasek, to continue due diligence. The group has indicated it could offer 470p a share, or £3.53bn, for the business, trumping an earlier agreed bid from Dubai Ports World.


Tomorrow 16

UK RESULTS: (interim) Murgitroyd Group, Spice Holdings

US RESULTS: (final) Pfizer


Tuesday 17

UK RESULTS: (F) Wogen; (I) Halladale Group, Pace Micro Technology, PKL Holdings, Thorntons

US RESULTS: (F) IBM, Intel, Yahoo

TRADING UPDATES: Blacks Leisure, Cairn Energy, JD Sports, Pearson, Tesco

Wednesday 18

UK RESULTS: (I) Bespak, DSG International, DTZ Holdings

US RESULTS: (1Q) Apple Computer; (F) JPMorgan Chase & Co

TRADING UPDATES: Austin Reed, Floors-2-Go, Kesa, LogicaCMG, SABMiller, Woolworths

Thursday 19

UK RESULTS: (F) GW Pharmaceuticals, Hartford Group; (3Q) Vedanta Resources

US RESULTS: (F) Merrill Lynch, Motorola


Friday 20

UK RESULTS: none scheduled

US RESULTS: (F) Citigroup, GE